DBOD. No. BP.1762/21.04.132/2004-05
3. The major modifications proposed in the existing CDR Scheme relate to
4. The proposed amendments to the guidelines are being issued as a draft for feedback from all concerned. The draft will be open for comments for a period of one month from the date of this letter. Comments on the proposed draft may be addressed to the undersigned at the address given below. Comments can also be sent by e-mail to Shri A.R. Appathurai, Asst.General Manager arappathurai@rbi.org.in and Shri Rajinder Kumar, Dy.General Manager r-kumar@rbi.org.in.
The Reserve Bank of India had undertaken a review of the working of the CDR mechanism in the month of August 2004 and a Special Group was constituted in September 2004 with Smt.S.Gopinath, Deputy Governor, RBI as Chairperson to review and suggest changes / improvements, if any, in the CDR mechanism. Based on the recommendations of the Special Group, CDR guidelines have been further revised. The changes to the existing guidelines are as under:
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CDR Standing Forum |
| 2.1 |
The RBI would not be a member of the CDR Standing Forum and Core Group. Its role will be confined to providing broad guidelines. |
| 2.2 |
The Forum, while laying down the policies and guidelines, should also set out the critical parameters for restructuring (i.e. maximum period for a unit to become viable under a restructuring package, minimum level of promoters’ sacrifice, etc.) to be followed by the CDR Empowered Group and CDR Cell for debt restructuring. |
| 3 |
Eligibility criteria |
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| 3.1.1 |
The CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts with outstanding exposure of Rs.10 crore and above by banks and institutions. |
| 3.1.2 |
In terms of the extant instructions, in no case, requests of any corporate indulging in wilful default, fraud or misfeasance even in a single bank will be considered for restructuring under the CDR mechanism. Modifications introduced recently in the system laid down for the identification of the wilful defaulters has made it more transparent and has provided an opportunity to the borrower before final classification is made. As a general principle therefore, wilful defaulters should not be entertained under the CDR mechanism. However, in deserving cases, the Core Group may review the reasons for classification of the borrower as wilful defaulter and satisfy itself that the borrower is in a position to rectify the wilful default provided he is granted an opportunity under the CDR mechanism. Such exceptional cases may be admitted for restructuring only with the approval of the Core Group. The Core Group may evolve policies and safeguards for dealing with cases of wilful default. |
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| 3.1.3 |
The accounts where recovery suits have been filed by the lenders against the company, may be eligible for consideration under the CDR mechanism provided, the initiative to resolve the case under the CDR mechanism is taken by at least 75% of the lenders (by value) and 60% of lenders in number. |
| 3.2 |
Legal Basis |
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| 3.2.1 |
In order to ensure discipline in the CDR mechanism, members of CDR may jointly or severally decide that those banks that have not joined the mechanism as members would not be eligible for future consortium / syndication arrangements for lending. For this purpose, a collective action clause may be incorporated in the loan agreements involving multiple lenders whereby all lenders agree to abide by the majority decision for restructuring of the account in case of need. |
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| 3.2.2 |
If 75 per cent of creditors by value and 60% of the creditors in number, approve a restructuring package of an existing debt (i.e., debt outstanding) under CDR mechanism, it shall be binding on the remaining creditors. |
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| 3.3 |
Stand-Still Clause |
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| 3.3.1 |
During pendency of the case with the CDR mechanism, the usual asset classification norms continue to apply and the process of reclassification of an asset does not stop merely because the case is referred to the CDR Cell. If restructuring under the CDR mechanism is approved and the approved package is implemented within three months from the date of approval by the Empowered Group, the asset classification status would be restored to the position, which existed when the reference to the Cell was made. Consequently, any additional provisions made by banks towards deterioration in the asset classification status during the pendency of the case with the CDR mechanism may be reversed. |
| 3.3.2 |
If an approved package remains unimplemented even three months after the date of approval by the Empowered Group, it would indicate that the success of the package is uncertain. Therefore, the asset classification status of the account should not be restored to the position as on the date of reference to the CDR Cell. This will ensure that banks which delay implementation of the package will not be allowed to enjoy the regulatory concessions |
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| 3.4 |
Additional finance |
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| 3.4.1 |
Additional finance, if any, is to be provided by all lenders irrespective of whether they are working capital or term lenders on a pro-rata basis. The additional finance may be treated as standard asset up to a period of one year after the first interest/ principal payment whichever is earlier falls due under the approved restructuring package. The income in this period may be recognized only on cash basis. If restructured asset does not qualify for up gradation at the end of the above period, additional finance shall be placed in the same asset classification category as the restructured debt. |
| 3.4.2 |
In case for any internal reason, any creditor (outside the minimum 75 and 60 per cent) does not wish to commit additional financing, that creditor will have the option to either (a) arrange for his share of additional financing to be provided by a new or existing creditor, or (b) agree to deferment of the first year’s interest due to him after the CDR package becomes effective. The first year’s deferred interest as mentioned above, without compounding, will be payable along with the last instalment of the principal due to the creditor |
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| 3.5 |
Exit Option |
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| 3.5.1 |
As mentioned in paragraph 3.4.2 above, the proposals for restructuring package should provide for option to a particular lender or lenders (outside the minimum 75 and 60 per cent who have agreed for restructuring) who for any internal reason, does/do not fully abide by the CDR Empowered Group's decision on restructuring. The lenders who wish to exit from the package would have the option to sell their existing share to either the existing lenders or fresh lenders, at an appropriate price, which would be decided mutually between the exiting lender and the taking over lender. The new lenders shall rank on par with the existing lenders for repayment and servicing of the dues since they have taken over the existing dues to the exiting lender. In addition, the 'exit option' will also be available to all other lenders within the minimum 75 and 60 per cent, provided the purchaser agrees to abide by the restructuring package approved by the Empowered Group. |
| 3.5.2 |
In order to bring more flexibility in the exit option, One Time Settlement can also be considered, wherever necessary, as a part of the restructuring package. |
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| 3.6 |
Conversion option |
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| 3.6.1 |
Equity acquired by way of conversion of debt / overdue interest under the CDR mechanism is allowed to be taken up without seeking prior approval from RBI even if the capital market ceiling is breached, subject to reporting such holdings to RBI every month along with the regular statement. However, banks will have to comply with the provisions of Section 19(2) of the BR Act. |
| 3.6.2 |
Acquisition of non-SLR securities by way of conversion of debt are exempted from the guidelines on non-SLR securities subject to periodical reporting to RBI |
| 3.6.3 |
The relaxation from ceilings mentioned in paras 3.6.1and 3.6.2 would be reviewed after a year. |
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| 3.7 |
Category 2 CDR System |
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For the second category of CDR where the accounts have been classified as ‘doubtful’ in the books of lenders, a minimum of 75% (by value) and 60% of the lenders in number should satisfy themselves of the viability of the account and consent for such restructuring. |
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| 4 |
Lenders Rights |
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All CDR approved packages must incorporate lenders’ right to accelerate repayment and borrowers’ right to pre-pay. The right of recompense should be based on certain performance criteria to be decided by the CDR Standing Forum. |
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| 5 |
Prudential and Accounting Issues |
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| 5.1 |
Accounts restructured under CDR system, including accounts classified as 'doubtful' under Category 2 CDR, would be eligible for regulatory concession in asset classification and provisioning on writing off/providing for economic sacrifice in terms of the circular DBOD.BP.BC.98/21.04.048/2000-01 dated March 30, 2001 only if
i. he restructuring under CDR is done for the first time,
ii. The unit becomes viable in 7 years and the repayment period for the restructured debts does not exceed 10 years,
iii. promoters’ sacrifice and additional funds brought by them should be a minimum of 15% of lenders’ sacrifice, and
iv. personal guarantee is offered by the promoter except when the unit is affected by external factors pertaining to the economy and industry. |
| 5.2. |
Treatment of ‘standard’ accounts restructured under CDR |
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| 5.2.1 |
A rescheduling of interest element either before commencement of commercial production or after commencement of commercial production but before the asset has been classified as substandard provided conditions (i) to (iv) of Para 5.1 are complied with would not cause an asset to be downgraded to sub-standard category on writing off/providing for the amount of sacrifice, if any, in the element of interest measured in present value terms. For this purpose, the sacrifice should be computed as the difference between the present value of future interest income reckoned based on the current BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring and the interest charged as per the restructuring package discounted by the current BPLR as on the date of restructuring plus appropriate term premium and credit risk premium as on the date of restructuring |
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| 5.3. |
Treatment of ‘sub-standard’ / ‘doubtful’ accounts restructured under CDR |
| 5.3.1 |
A rescheduling of interest element would render a sub-standard / ‘doubtful’ asset eligible to be continued to be classified in sub-standard / ‘doubtful’ category for the specified period provided the conditions (i) to (iv) of Para 5.1 are complied with and the amount of sacrifice, if any, in the element of interest, measured in present value terms computed as per the methodology described in Para 5.2.1 is either written off or provision is made to the extent of the sacrifice involved. |
| 5.3.2 |
Banks/ FIs may recalculate the amount of sacrifice at each balance sheet date so as to capture the changes in the fair value on account of changes in BPLR, term premium and the credit category of the borrower and the amount of excess provision, if any may be reversed.
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| 5.3.3 |
Economic sacrifice must necessarily be provided for by debit to the Profit & Loss account. In the event a zero coupon bond is taken against the sacrifice, it should be valued at Re1/- till the maturity of the bond. This will ensure that the effect of charging off the economic sacrifice to the Profit & Loss account is not negated. |
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| 5.3.4 |
In case a restructured asset is subjected to restructuring on a subsequent occasion when the restructured asset is a standard asset, it should be classified as sub-standard. The restructured (including restructured sub-standard and doubtful assets) may be allowed to be upgraded to standard asset category after one year from the date of first payment of interest or repayment of principal, whichever falls due first in terms of the restructuring package, subject to satisfactory performance during this period. |
| 5.3.5 |
If a standard asset is taken up for restructuring before commencement of production and the restructuring package provides a longer period of moratorium on interest payments beyond the expected date of commercial production / date of commercial production vis-à-vis the original moratorium period, the asset can no more be treated as standard asset. It may, therefore, be classified as sub-standard. The same regulatory treatment will apply if a standard asset is taken up for restructuring after commencement of production and the restructuring package provides for a longer period of moratorium on interest payments than the original moratorium period.
In case of sub-standard / doubtful assets, if there is moratorium on interest/principal repayments, up gradation of the asset category should only be considered after one year from the time when the first interest/principal payment, whichever is earlier, falls due and subject to satisfactory payment performance during this period in the usual manner. |
| 5.3.6 |
Where overdue interest is funded or outstanding principal and interest components are converted into equity, debentures, zero coupon bonds or other instruments and income is recognized in consequence, full provision should be made for the amount of income so recognized. Equity, debentures and other financial instruments acquired by way of conversion of outstanding principal and interest should be classified and valued in accordance with the extant instructions except to the extent that (a) equity may be valued as per market value, if quoted (b) in cases where equity is not quoted, valuation may be at break-up value in respect of standard assets and (c) in respect of sub-standard / doubtful assets, equity may be initially valued at Re1 and at break-up value after restoration / up gradation to standard category. |
| 5.3.7 |
If the conversion of interest is into equity, which is quoted, interest income can be recognized after the account is upgraded to the standard category at market value of equity, on the date of such up gradation, not exceeding the amount of interest converted into equity. Such equity, if held under HTM category must thereafter be classified in the 'available for sale' category and valued at lower of cost or market value. If the conversion of interest is into equity, which is not quoted, interest income should not be recognized.
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| 5.3.8 |
In case of conversion of principal and / or interest into debentures, zero coupon bonds, etc., such instruments should be treated as NPA ab-initio in the same asset classification category as the loan if the loan’s classification is sub-standard or doubtful on implementation of the restructuring package and provision should be made as per the norms. Consequently, income should be recognized on these instruments only on realization basis. The income in respect of unrealised interest which is converted into debentures or any fixed maturity instruments, would be recognized only on redemption of such instruments. |
| 6 |
Disclosure |
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| 6.1 |
Banks / FIs should also disclose in their published annual Balance Sheets, under "Notes on Accounts", the following information in respect of corporate debt restructuring undertaken during the year: |
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- Total number of accounts total amount of loan assets and the amount of sacrifice in the restructuring cases under CDR.
[(a) = (b)+(c)+(d)]
- The number, amount and sacrifice in standard assets subjected to CDR.
- The number, amount and sacrifice in sub-standard assets subjected to CDR.
The number, amount and sacrifice in doubtful assets subjected to CDR
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